Biz Brain: How much to trust financial planner?

Q. My sister, 65, invested the bulk of her savings with a financial planner who was recommended by a friend who works at the same company as the planner. I would have only given a third of my money to see what he did with it. Am I being overly cautious? What is the best way to research the credentials and track record of this financial planner? What is a reasonable time frame in which to judge what he does with the money?

— Brother Jeff

A. Great question.

There are several ways to check out a financial pro.

Start by asking if the person is a financial planner or a financial adviser.

"An adviser owes their obligation to their company, where a financial planner must legally act in your best interests," said Jerry Lynch, a certified financial planner with JFL Consulting in Fairfield.

Learn what designations they have. If the pro has simply passed an exam that allows him to sell securities, that’s not enough, he said.

"A monkey with a free weekend can pass a securities exam," said Lynch.

Rather, look to those who are Certified Financial Planners, Certified Public Accountants and the like, Lynch said, because these designations take more time and effort to attain.

Check the Financial Industry Regulatory Authority, or FINRA (finra.org), for the pro’s credentials and disciplinary history. The Securities and Exchange Commission’s site has a similar tool at sec.gov. Many associations — those that award designations — have a similar background check tool on their websites.

Ask the pro if he has experience working with clients similar to you, and in what manner, and how often, he communicates with clients, said James Marchesi, a certified financial planner with Mill Ridge Wealth Management in Chester.

"How a relationship is set up is very important — and there are different types of arrangements," he said. "The optimal set-up would be determined by your sister’s needs."

Starting a pro with a third of your investments seems to make sense, but there can be disadvantages.

"If there is a fee-based arrangement, there might be pricing efficiencies if an investor starts with a bigger asset base," Marchesi said.

Marchesi said nothing should be done after only one meeting. The initial meeting should be to exchange information, including pricing options. The next meeting should be to discuss overall asset management philosophy and core planning points, then subsequent meetings should be used to review recommended investment components/rationale and relationship pricing elements.

Lynch said giving a third to the adviser is a mistake.

"If he knows that he only has a third, then more likely than not he will take risks to get higher performance, which puts you at risk," Lynch said. "Just like you have to trust your doctor, CPA and attorney, you also need to trust your planner — not blind trust where you do not understand what they are doing, but you need to feel that this person has your best interest in mind."

Lynch said you should judge a financial planner not only on investments (which could take five years or more to play out), but their overall work, which should include tax and estate planning, insurance reviews and more.